Zynga and other social gaming operators are preparing to enter the real-money online gambling market. What at first glance seems like natural step for Zynga and Co. to make easy money in a billion-dollar industry is in reality much more complex undertaking. Here, one of the most renowned researchers of the online gambling industry (see also MECN) offers an in-depth analysis of the plans of Zynga and other social gaming operators.
Since the success of Zynga’s Texas Hold’Em poker, the social versions of traditional gambling games (e.g., poker, bingo, slots, …) have become an integral part of Facebook’s game offers. But now both the social gaming and the online gambling industry are beginning to discover social gam(bl)ing as a future key revenue source.
Social gaming industry eager to offer real-money gambling
The recent activities of Zynsoundga and Facebook and the launch of Betable are clear signs that the social gaming industry has high hopes for its move into real-money gambling:
- Zynga announced that the company wants to move into real-money online gambling. This is an understandable move in line with the company’s strategy to find new revenue sources in addition to selling virtual chips and goods, …
- Facebook and Gamesys just started the first real-money gambling offer in the U.K., and many others will surely follow.
- Betable just recently launched its product which supports social gaming operators to offer real-money gambling without many hassles; one of its first customers is Big Fish.
But online gambling operators are also eager to offer social gam(bl)ing
Social gaming operators may find it interesting that the online gambling industry is thinking exactly the other way around. As the online gambling industry is experiencing tougher times, many operators believe that social gaming and gambling will be their new big revenue source:
- Market leader BwinParty enters social gaming market – BwinParty, a market leader in the online gambling sphere, has also entered the social gaming market with a big bang and is willing to invest up to USD 50 million over the next 24 months. Its primary business model will be the “sale of virtual credits to purchase entries as well as virtual gifts, decorations, and consumables”, and slots and poker will be launched first.
- Social gam(bl)ing everywhere – In the online gambling industry social gaming is everywhere. No conference (e.g., key conference EiG) is without a social media evangelists, no industry magazine without social gaming specials, … and Silicon Valley seems to hold the future of gambling in its hands.
- Hefty investments by traditional gambling giants in social gaming – In the past month, traditional gambling heavyweights have become very active in the social gaming market. For example, the U.S. gambling service/technology provider IGT bought the social gaming operator DoubleDown for ca. USD 500 million, and Caesars acquired Playtika.
Social gambling – it’s going to be tough
Readers of presentations explaining the attractiveness of the real-money gambling sector cannot help wonder why companies ever invested in social gaming in the first place rather than putting their money into (social) online gambling right away: much higher ARPUs, much bigger market, hardly any legal challenges, … However, the reality presents a much more complex picture without any sure-fire successes.
Complex legal and regulatory challenges
Legal and regulatory issues are among the most relevant issues for the online gambling industry. In general, in most jurisdictions online gambling is illegal unless you have a local license. Most states offer such licenses only to monopolistic state/public operators (e.g., state lotteries), and when such licenses are given out to private operators, the latter often have to pay hefty taxes (e.g., France) and comply with strict regulations (e.g., customer identification, responsible gambling, …).
There are only very few jurisdictions where you can get such online gambling licenses more “easily”, among them Malta, Gibraltar, Costa Rica, … and, last but not least, the U.K. Many operators holding licenses issued in such jurisdictions are trying to use their licenses also in other states – this in turn leads to endless legal disputes with the respective local authorities. The final outcome of these disputes ranges from “continue and build up a billion-dollar business” to “welcome in jail”. Because of these complex issues the current focus of social gambling is on entering the market in the U.K.
Another question is whether social gam(bl)ing might soon be regulated separately. In our opinion, this is unlikely because all relevant sectors are already regulated. If it’s a matter of real-money gambling (social or not), you have to consider the pertinent gambling laws. Most laws define an activity as gambling only if it offers the chance to win “real” money (or a similar non-cash benefit). If the “only” prize is the chance to continue playing the game (by winning more chips/credits), the activity is likely not considered gambling and is subject to the same laws as all other online games (e.g., Farmville).
As described above, the (social) online gambling market is experiencing a wave of new market competitors, and at the same time many online gambling segments (especially online poker) are experiencing increasing market saturation. As our recent report Online Gambling Benchmarking shows, the online poker business of many key gambling operators decreased on average by 7% in 2011 (2010 = -15%).
If you want to be 100% legally safe, your profits will likely suffer
Most social gambling operators, especially if headquartered in the U.S., will be interested in being 100% safe when it comes to compliance issues. The only way to achieve this is to obtain a local license where available (e.g., France, Italy, Germany, U.K., …), but these licenses usually go hand in hand with hefty taxes and strict regulatory requirements.
However, in contrast to traditional online gambling offers, social gambling has one important advantage. In the social world, Facebook ensures (at least for the time being) that unlicensed grey market operators keep out of the social communities. Therefore, social gambling is the only market where licensed operators do not have to compete with unlicensed operators who can offer more attractive products because they do not have to comply with any regulations or pay taxes
The opening of the U.S. online poker market, a never-ending story
Many social gaming operators also count on the real-money online poker market in the U.S., worth billions of dollars, being liberalised very soon. We do not have a crystal ball, but the online gambling industry has been expecting the imminent liberalisation of the U.S. online poker market for many years and has often believed the market to be “on the verge” of being liberalised. If this hoped-for liberalisation becomes reality in the near future, it will probably involve solutions on the state level, which are burdensome for all operators.
Not all gambling is social
Zynga poker is still the industry standard when it comes to social gaming because poker is perfectly suited for the social world. But what about the other big segments: betting, slots/casino, lottery, and bingo? With the exception of bingo, these other games do not have an immediately obvious social component. In most social casinos/slot machine halls (apparently they are the key focus of the industry) the “social” aspect seems (so far) to be an afterthought. In addition, social betting seems to be a hard row to hoe as the recent insolvency of social betting operator Crowdpark shows, and social lotteries seem to be relegated to a niche of their own.
It seems that gambling-style social gaming more and more neglects the social component. But if operators of social games want to win over customers from traditional online gambling offers, they should put their focus on the social component of the games. This might take some effort, but even traditional lotteries were able to add a social component (and were successful), as the example of El Gordo and Postcode Lottery shows.
Get your industry insights first
As described above, the real-money online gambling market is a financial and legal minefield that is probably already past its prime. Play-money social games that are successful in restrictive markets, such as the U.S., are probably not easily turned into real-money offers in liberalised markets with more than 100 competing offers/sites.
Therefore, before entering this minefield, you should thoroughly investigate it by getting as much industry expertise as you can. In addition to extensive number crunching of key financial figures and KPIs (see also MECN’s Online Gambling Benchmarking), hiring former online gambling executives is highly recommended. Zynga has now taken the first step and hired online gambling veteran Maytal Ginsburg Olsha away from 888.com.